Horgan waxes energetic on energy

LisaSanders

DALLAS (CBS.MW) - VJ Horgan, TXU's president of energy trading, is absolutely energetic on the subject of power.

Horgan was hired in September to head the group as TXU positions itself for Texas' deregulation of retail electricity in January 2002.

She is one of two women to have a position at the top level of management in the industry. Mirant
MIR, +0.00%
CEO Marce Fuller was once president of trading and marketing operations before she took over the helm of the company.

Energy trading, as defined by TXU, is the means to identify, measure, and value a portfolio of assets, which can include buying and selling of different commodities, such as electricity and natural gas.

It also entails managing contracts and obligations and assessing and managing risk. TXU Electric & Gas, a subsidiary of Dallas-based
TXU
is Texas' largest investor-owned utility.

In an interview with CBS.MarketWatch.com, Horgan expanded on the subject of energy trading, the problems in California, and how TXU will fare in a completely deregulated environment. A law deregulating Texas wholesale electricity was signed in 1995.

CBS.MW: How does energy trading work?

Horgan: We're but one part of an overall successful strategy built around portfolio management. Our ownership of upstream assets as well as downstream assets represented by customer relationships and an extensive ability to aggregate these customer obligations is absolutely integral to the portfolio management model...While your upstream capabilities are focused on operating assets and having a model predicated on operational excellence, our downstream assets, again the end-use markets, are very much focused on...understanding how customers buy, what they want to buy, anticipating those needs and being in a position to solve them. Trading is the guy in the middle. We are very market focused and as we look at the factors that influence current markets but also forward markets, we are the eyes on the market that help assess in a given region where we want to position ourselves along that energy value chain.

CBS.MW: If California's utilities had been in a position to hedge, could the energy crisis have been avoided?

Horgan: They certainly could have mitigated a lot more of the risk. When you can't hedge and you're entirely at the whim of market movements, and you have an obligation to serve...let's look at the structural implications of what they're also faced with. Those that had an obligation to serve the end-use customer load were forced to divest of their upstream assets. Back to the portfolio management model, you're being forced to operate with only half the equation. In addition, if you're long customers and you have an obligation to serve them, you're effectively short the market, and you can't do anything to mitigate that risk. Again, when you're forced or you choose to operate with only half of the portfolio management dimension, the propensity for bad things happening is much greater.

CBS.MW: Do you sell power into California, and if not, why not?

Horgan: Currently we do not. We have some fairly extensive gas operations in California.

CBS.MW: Did you foresee a problem in California?

Horgan: Yes with regard to California in terms of the leverage to the commodity.

CBS.MW: What markets are you interested in?

Horgan: When we look outside of Texas to the markets that will provide the greatest opportunity for growth, we have undertaken an extensive regional assessment study that looks at fundamentals like supply in the region - what resources exist both from a generation perspective as well as fuel resources - load growth, transmission constraints, transportation constraints, environmental legislation or constraints, market and regulatory structure, and we assess from the perspective given the competencies we have in both operating upstream assets, aggregating customers in the downstream markets and our ability to develop and deliver our wholesale capabilities in the energy trading company. We assess what is the best market entry strategy in the regions we feel that have the dynamics that will enable us to not just establish what might be an ownership position in a particular asset or an aggregation of customers but over the long haul would enable us to establish the balance perspective across both upstream and downstream assets.

CBS.MW: What is current status of the supply situation in the U.S.? Where there are constraints, how can they be overcome?

Horgan: There is no one U.S. market. When you look at the realities of how the individual sub-regions trade and how really reliability is determined in those regions, yes, there are markets that have extreme dislocations between supply and demand. The supply and demand can also be excess supply. Other markets with constraints traditionally have been in the mid-continent around the Illinois region; some into the mid Atlantic states, and some segments of New York have constraints. The Southwest, at this stage, has seen a reasonable amount of new construction in the past several years in large part because people were trying to overcome the difficulty of [locating] in California. We're probably okay in the Southwest. The solutions: you have a number of companies that have come out very strongly with a strategy of meeting that supply shortage.

CBS.MW: If the vast majority of the new power plants being built in the U.S. are natural-gas fired, and natural gas has already been bid up two to three times what it was a year ago, does that suggest that once these plants come on line, prices for the electricity they generate will remain high?

Horgan: I think that depends on what the supply response is, how deep and how swift the supply responses are on the gas side. There are two aspects to that: how much natural gas really exists and the actual transportation capacity to get it to the market. Gas prices have been high before and generally have never been sustainable. Of course, we haven't had the level of demand as contemplated not only with the existing plants that have come on but also the ones that are in backlog. So, generally markets are responsive and if gas prices were going to be high because there was neither a swift nor a deep response from the gas supply side of the equation, then a natural response would be for people to start building coal plants.

CBS.MW: Do you think it's necessary for the industry to pursue alternative energy sources like clean coal and liquefied natural gas?

Horgan: That's purely an economic answer. What you'll see is a technology response to the current state of price dislocation, and that gets them to how sustainable is that price. If prices are high for a year, they are certainly not going to cover the cost of some of the new technologies.

CBS.MW: Your job description includes positioning TXU to participate in deregulation of the Texas electricity markets in 2002. What does that entail?

Horgan: The previously vertically integrated companies have to file plans for both the generation company and the retail company. There's a systems infrastructure requirement, there's the development of new processes, procedures and control around that, and maybe most importantly bringing an entire new level of skill into the organization, which will enable us to manage what will then be, effectively, an entire merchant portfolio. Trading brings to the portfolio management model a market focus, the analytical skills and capabilities to assess alternative investments, and part of the positioning anticipated there will (involve) rigorously evaluating our existing portfolio of assets, whether upstream or downstream. In transitioning and positioning the company, that means getting the appropriate skills in place to evaluate the risks, and up to and including how we want to change the composition of that portfolio as we enter the deregulated marketplace. We will be ready.

CBS.MW: Do you see any of the same problems in California affecting Texas?

Horgan: Absolutely not. Our market structure is very different. Unlike California where demand greatly exceeded supply, we have a market that is generously supplied.

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